DJ XPO's Earnings Beat Forecasts. It's Good News on the Economy -- Barrons.com

By Al Root

The shipping company XPO Logistics' earnings exceeded reduced expectations -- a common theme this profit-reporting season -- and although things were tough in April, May and June, the overall results look solid.

There are signs an industrial recovery is under way.

For the second quarter, XPO (ticker: XPO) reported a loss of 63 cents a share from $3.5 billion in sales. Wall Street was looking for a 76 cents-per-share loss from $3.4 billion in sales.

Beating earnings is always a good thing, but it is important to remember that the company reported earnings of $1.28 a share from $4.2 billion in sales a year ago. The pandemic has hit many companies hard, including XPO.

Many logistics providers have benefited during the pandemic from the explosion in e-commerce shipping. United Parcel Service (UPS), for instance, crushed second-quarter earnings expectations Thursday. It's shares rose 14.4% after the numbers came out.

XPO benefited from e-commerce trends as well. The company is a large provider of last-mile shipping for large equipment. XPO has been delivering a lot of Peloton Interactive (PTON) bikes lately. But much of XPO's business serves industrial customers. And many U.S. manufacturing facilities across many industries shut during the quarter to help slow the spread of coronavirus.

" Automotive went to zero," explained CEO Bradley Jacobs to Barron's. "But plants opened back up in May." Daily volumes in shipments of less than a truckload, or LTL -- a proxy for industrial activity -- dropped 22% year over year in April. Volumes in July, however, are down only single- digit percentage points.

The second quarter, as a result of recent improvement, should be the trough in economic activity. For the third quarter, XPO management told investors to expect $350 million in Ebitda, or earnings before interest, taxes, depreciation, and amortization. That compares with $172 million earned in the second quarter and $333 million in the first quarter of 2020.

Wall Street's financial models point to Ebitda of $323 million, so management's guidance looks good relative to expectations as well.

XPO stock reflects some relatively high expectations. Shares trade for about 23 times estimated 2021 earnings, a premium to the 20 times multiple for the market. What's more, shares are up about 8% year to date, better than comparable returns of the S&P 500 and Dow Jones Industrial Average.

Shares were up about 2.3%, to $89, in after-hours trading. For the stock to keep gaining from that level, things need to keep getting better.

"The European recovery is ahead of the U.S.," added Jacobs. XPO does a lot of business in Europe as well as the U.S. "Covid-19 started there earlier and [Europe] executed nationwide lock downs, but the North American rebound is the real deal."

The rebound is an external factor benefiting the company, but XPO is taking action internally as well. It named two new executives to the team when it released earnings. Eduardo Pelleissone has been chosen as chief transformation officer and Alex Santoro has been named executive vice president for operations. Both will be tasked with helping XPO take out $700 million to $1 billion in annual costs.

Cost reduction can benefit the company in the long run, regardless of what the economy does.

XPO management will host a conference call for analysts and investors at 8:30 a.m. Eastern Friday morning to discuss the results.

Write to Al Root at allen.root@dowjones.com

(END) Dow Jones Newswires

July 30, 2020 17:30 ET (21:30 GMT)

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